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In the case at hand, petitioners have failed to convince us
of a specific amount that was withheld as retentions. We know
that the contractual terms were not followed, that no reliable
documentary evidence is available to establish the true retention
amounts, and that Mr. Farnsworth’s testimony concerning the
retention amounts satisfies neither the rules of arithmetic nor
the laws of probability.
More importantly, even if petitioners had established the
retention amounts, petitioners have failed to establish by a
preponderance of the evidence that the retention amounts were
included in Mr. Farnsworth’s taxable income. In order for the
retention amounts to give Mr. Farnsworth a basis in the DMAA,
petitioners would have to establish that Mr. Farnsworth reported
the retention amounts as income for the years in which they were
withheld; otherwise the retention amounts would not constitute a
cost of his interest in the DMAA that would be taken into account
for income tax purposes. See sec. 1012 (basis of property is
cost); Gertz v. Commissioner, 64 T.C. 598 (1975) (disallowing bad
debt deduction for unpaid wages that were never included in
income).
Petitioners offered no evidence, other than Mr. Farnsworth’s
self-serving testimony, to show that Mr. Farnsworth previously
included the retention amounts in income.
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